FINANCE

House Probe Into Cause Of Economic Crisis Turns Partisan

By Dan Friedman

Three days after passing a financial rescue bill, House Democrats today slammed Lehman Brothers Chief Executive Officer Richard Fuld and the SEC's loosening of investment banking regulations in what looks to be a politically charged effort to weigh "accountability" for the current financial crisis. A hearing today on Lehman's bankruptcy was the first of five scheduled for this month by the House Oversight and Government Reform Committee. In a departure from bipartisanship that marked negotiations over the $700 billion bailout bill, House Republicans have ripped the hearings as efforts to frame the financial crisis to help Democrats in next month's elections. The hearings were "organized to deflect from Congress any blame and put it on Wall Street," said Rep. John Mica, R-Fla. Blame for the crisis may also have policy implications, with House Financial Services Chairman Barney Frank in recent days outlining plans to block excessive risk-taking by investment banks, hedge funds, investment banks and other institutions. Oversight and Government Reform Chairman Henry Waxman and House Speaker Pelosi have said the ongoing crisis requires quick oversight.

Waxman said many experts believe Lehman's fall "triggered the credit freeze that is choking our economy and made the $700 billion rescue necessary." He faulted the SEC's relaxation in 2004 of a rule that limited the amount investment banks could borrow in relation to their assets. Several witnesses today said Lehman leveraged their assets too aggressively to invest in products, including mortgage-backed securities. Luigi Zingales, a University of Chicago finance professor, testified that the complexity and secrecy of bank models for weighing risk, and inherent flaws in the models, led banks to buy mortgage-related products without knowing their exposure. But panel Democrats took specific aim at executive compensation. Waxman faulted Fuld for paying out $10 billion in bonuses to executives in late 2007 as the company's board heard a warning that "liquidity can disappear fast." Noting Fuld received more than $400 million since 2000, despite the company's current bankruptcy and the economic crisis, Waxman asked Fuld "is this fair?" Fuld defended his compensation before the company's collapse, and said he did not believe in late 2007 that the company had a liquidity problem.

Disputing charges that he was ducking blame for Lehman's fall, Fuld said he takes "full responsibility," adding that, "With the benefit of hindsight ... I would have done things differently," and declaring he felt "horrible about what happened." Many panel Republicans, in an argument likely to be repeated at Tuesday's hearing on the bailout of insurer American International Group Inc., said the panel's investigation should include examination of Freddie Mac and Fannie Mae's role in the mortgage crisis. A report by the panel's minority staff attributed the origin of the crisis in part to Democratic pressure on the entities to help low-income borrowers get mortgages. The report said Fannie and Freddie bought their way out of regulations through contributions to members of committees overseeing their work.